Break Up the Banks: By the Numbers

Break Up the Banks: By the Numbers

Any time in the next couple days, the Senate may consider a measure,
sponsored by Senators Sherrod Brown, D-Ohio, and Ted Kaufman,
D-Delaware, to break up the biggest banks. It's a vital step to
strengthening the economy and rescuing our democracy.

It's past time to break up the big banks. They take on too much risk
and endanger the financial system. They benefit from unfair subsidies
and the assurance that the government will bail them out in times of
trouble. They have far too much political influence and threaten our
democracy.

Evidence:

1. 45.23, 16.56, 65.61, 36.42

Industry concentration has soared over the last quarter century. From
1993 to 2009, according to data compiled by Iren Levina, Gerald Epstein
and James Crotty of the University of Massachusetts, Amherst the top
five commercial banks went from having 16.56 of total bank assets to
45.23 -- a jump of almost three times. The top five investment banks in
2007 had 65.61 percent of overall investment banking revenue, up from
36.43 in 1993.

Thanks to a series of shotgun mergers amidst the worst of the financial
crisis, the top banks actually have a much greater share of banking
assets than they did before the crash.

2. $306 billion

In a completely ad hoc subsidy, the federal government in late 2008
agreed to provide a guarantee on a $306 billion portfolio of
Citigroup's assets, covering potential losses by the failing giant.

It is unfathomable that the government would take such action for smaller firms, and it has not.

3. 97 percent

The top five banks dominate the derivatives trade, accounting for 97
percent of banks' overall derivative holdings, and approximately 90
percent of the overall financial derivatives market.

It is true, as the financial lobby argues, that derivatives can serve a
useful social purpose in enabling farmers and firms to hedge protect
themselves against unexpected future events. But the concentration in
the financial derivatives trade shows that the vast majority of what is
going on is speculation.

4. $34 billion

That's the amount of subsidy now claimed by the biggest banks,
according to Dean Baker and Travis McArthur of the Center for Economic
and Policy Research, thanks to their perceived "too-big-to-fail"
status. Because lenders in financial markets believe the U.S.
government will bail out the largest banks if they face failure, they
are willing to lend to the giant banks at rates considerably below that
available to smaller banks. That interest rate differential translates
into a $34 billion-a-year benefit for the biggest banks.

5. 427

That's the number of subsidiaries that the Government Accounting Office
found in a December 2008 report that Citigroup maintained in
jurisdictions listed as tax havens or financial privacy jurisdictions
(including 90 in the Cayman Islands alone). This was the largest number
of any Fortune 100 company.

This is an astounding fact in its own right, but it also illustrates a
more general proposition: the biggest banks are involved in the most
complicated and deceptive accounting maneuvers. This includes the use
of offshore tax havens, off-the-books accounting, tricks like Lehman's
Repo 105 (scheduled swaps to obscure how much the firm was relying on
borrowed money).

The scale of the biggest banks makes it much more possible to invest in
these kinds of accounting ruses, and the size of their balance sheets
makes it much more possible to obscure where the money (or mispriced
assets) are hidden.

6. $16.9 billion, $26.9 billion, $14.4 billion

Those figures are the amounts paid in compensation and bonuses by
Goldman Sachs, J.P. Morgan and Morgan Stanley in 2009 -- the same year
these firms benefiting from trillions of dollars in public supports
provided to the financial sector. The outrage speaks for itself.

In fairness, as a commercial bank conglomerate, J.P. Morgan has more
than 200,000 employees, most of whom are not making out like bandits --
but a very substantial portion are.

These firms tout that they have paid back their bank bailout money, but
they continue to benefit from the other massive subsidies being
provided to the financial sector.

7. $28.9 million

At the giant firms, there are rich rewards for success -- but failure
is rewarded, too. Between 2000 and 2007 the leaders of 10 companies
that collapsed in the financial crisis or survived thanks to government
bailout received an average of $28.9 million a year. That’s 575 times
the median family income in the United States for 2007.

These numbers may understate things. Business Week reports there is
reason to suspect that CEO pay at Lehman Brothers, and possibly other
firms, has systematically been under-reported.

8. 33, 29, 22

Those are the number of lobbyists employed in 2009 with previous
federal government experience by, respectively, Goldman Sachs,
Citigroup and J.P. Morgan.

The giant financial firms are among the worst exploiters of the
revolving door, showering riches on one-time government employees, who
capitalize on their relationships with former colleagues still in
government positions.

Smaller firms can't hope to match that kind of insider influence.

9. Financial lobbying correlates with recklessness

An intriguing study from the International Monetary Fund has found that
financial firms that do more lobbying are more reckless and engage in
riskier practices. The IMF study does not correlate size with
recklessness, but the bigger firms spend far more on lobbying than
smaller firms.

Concludes the study: "We show that lenders that lobby more intensively
on these specific issues [related to mortgage lending] have (i) more
lax lending standards measured by loan-to-income ratio, (ii) greater
tendency to securitize, and (iii) faster growing mortgage loan
portfolios. Ex post, delinquency rates are higher in areas in which
lobbying lenders’ mortgage lending grew faster, and, during key events
of the crisis, these lenders experienced negative abnormal stock
returns. These findings seem to be consistent with a moral hazard
interpretation whereby financial intermediaries lobby to obtain private
benefits, making loans under less stringent terms."

10. Robert Rubin, Henry Paulson

The two most prominent Treasury Secretaries in recent decades both
stepped into top government posts after leading Goldman Sachs. Rubin
left the Treasury Department to become an executive at Citigroup.

The result is that people steeped in Wall Street ideology shaped
national economic policy. Not unimportantly, they played key roles in
driving deregulation and in putting in place the Wall Street bailout
(2008-present).

Imagine if, instead of Rubin and Paulson, the Treasury Secretary during
their tenures had been former community development bankers. History
would be dramatically different. And better.

Senator Chris Dodd, D-Connecticut, has just announced that he has
reached a deal with Senator Richard Shelby, R-Alabama, on a "resolution
authority," which would have the job of closing down large failing
financial institutions. Senator Dodd says that this authority --
combined with new powers for regulators in extraordinary instances to
close large financial institutions if they pose a "grave threat" to
financial stability -- ensures that there will be no taxpayer-funded
bailouts in the future.

The resolution authority is a good thing, but Senator Dodd is mistaken
in saying it is sufficient to prevent future bailouts. In times of
crisis, regulators are still likely to choose bailouts rather than risk
starting a chain reaction of financial institution failures. The only
way to avoid this problem is to shrink the size of the big banks, so
their failure does not threaten the financial system's stability.

Nor does a resolution authority do anything about the other, ongoing
perils of bank giantism, including the undermining of our democracy.

The Brown-Kaufman break-up-the-banks amendment remains as desperately
needed as ever. Call your senators today to support the amendment to
break up the banks. To do so, or learn more, go here.

Robert Weissman is the president of Public Citizen. Weissman was formerly director of Essential Action, editor of Multinational Monitor, a magazine that tracks corporate actions worldwide, and a public interest attorney at the Center for Study of Responsive Law. He was a leader in organizing the 2000 IMF and World Bank protests in D.C. and helped make HIV drugs available to the developing world.

Further

Surrounded by a massive police presence, the country's top law enforcement official told a group of carefully screened students at Georgetown's Law School that, "In this great land, the government does not tell you what to think or what to say." In his speech, only announced the day before, Sessions went on to denounce uppity knee-taking football players and defend his boss' call, hours before, for them to be fired. We may need to upgrade the ole Irony Alert buzzer. It can't keep up.